Bankruptcy flood must be stopped...

July 16, 1998|By Froma Harrop

I'LL NEVER forget sitting around an old Connecticut farmhouse and trying to explain to my mother-in-law what a mortgage was. We told the elderly woman how the bank would lend you money for part of the house price. If you missed too many monthly payments, the bank could take over the property. "Do you mean to say that you don't really own your house?" she asked in disbelief. Mother never used a credit card. Her car was clunky and her dresses vintage. Her Yankee farmer mentality could not countenance buying anything for which she didn't already have the money. When she did have a decent amount of assets later in life, she still couldn't bring herself to buy anything.

Yuppie influx

In mother's last years, young people moved into town and surrounded her fields with massive new houses on two-acre lots. The farmhouse never had a dishwasher, and we'd all take the laundry to the Laundromat in town. The new houses had Jacuzzis. Parked outside were four-wheel drives and snowmobiles and lawn mowers you rode. Even children buzzed around on motorized bicycles. Mother was amazed at the kind of spending these people did. But what really floored her was learning that they were doing it all on credit. Couples would have two or three jobs between them just to keep up their monthly payments. She thought her town had been taken over by Martians.

Had mother made it to 1998, she would have found the situation even more bizarre. Money seems to be flowing through the streets. The stock market booms. Both inflation and interest rates stand at their lowest levels in years. Unemployment, meanwhile, scrapes bottom. But while the Dow Jones average hits record highs, so does the number of Americans filing for bankruptcy -- 1.4 million last year. Americans now spend 18 percent of their disposable income to service their debts -- another record. Outstanding consumer-loan balances rise even as credit card rates remain punishingly high.

One only shudders to think what would happen if another Great Depression -- or even Middling Recession -- should strike us. My mother-in-law described how, during the Depression, hobos would come by the kitchen door and beg for food. They were fairly scary fellows. Her mother gave them something to eat and perhaps a dry night in one of the barns. She never forgot how bad things could get.

What, other than short memories, accounts for this massive piling up of personal debt? Well, most anyone can obtain credit cards. Home-equity loans make accumulating debt seem less threatening. The interest charged on home-equity loans is lower than that on the typical credit card, and tax deductible besides. nTC Consumers buried in credit-card debt are told to pay off these high-interest loans with money borrowed on their home's equity. This is good advice. Many, however, wipe the credit-card slate clean only to start working up new unpaid balances.

Then there's always bankruptcy. Going into bankruptcy used to be a personal disgrace. Advertisements for bankruptcy lawyers now portray the move as just another financial strategy. About 70 percent of individuals who file for bankruptcy head for the least restrictive program, Chapter 7, which erases all debt not paid off by sale of assets. Some states further reduce the pain by shielding certain assets from liquidation. Florida, for example, allows the bankrupt to keep a house. Thus, financier Paul Bilzerian bought a $6 million house in Florida right before declaring bankruptcy.

The ease with which one can walk away from financial obligations naturally concerns lenders. Congress is wisely trying tighten up the bankruptcy laws. Some irresponsible Democrats are opposing these measures, which would establish "means test" to determine who is eligible for Chapter 7 and who has the income to pay off more of their debts.

Over the edge

But can legislation change Americans' deep-seated desire for the trappings of wealth that ordinary incomes cannot support? Or the widespread misconception that anyone can have anything he or she wants by borrowing money, and that accumulating debt can go on indefinitely? A serious economic ++ downturn could teach a vivid lesson as it sends much of the debt-burdened middle class over the financial abyss. But there surely must be easier ways to promote financial prudence.